Market Valuation and Acquisition Quality: Empirical Evidence

Existing research shows that significantly more acquisitions occur when stock markets are booming than when markets are depressed. Rhodes-Kropf and Viswanathan (2004) hypothesize that firm-specific and market-wide (mis-)valuations lead to an excess of mergers, and these will be value destroying. Thi...

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Bibliographic Details
Published in:The Review of financial studies 2009-02, Vol.22 (2), p.633-679
Main Authors: Bouwman, Christa H. S., Fuller, Kathleen, Nain, Amrita S.
Format: Article
Language:English
Subjects:
Abnormal returns
Acquisitions
Acquisitions & mergers
Bear markets
Bids
Business strategies
Cash
Corporate mergers
Economic activity
Economic conditions
Economic models
Economic theory
Financial portfolios
Financing methods
Herding
Industrial market
Market value
Mergers
Price earnings ratio
Prices
Purchasing
School finance
Securities markets
Seminars
Stock exchanges
Stock prices
Stockholders
Studies
Target acquisitions
Tender offers
Valuation
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Summary:Existing research shows that significantly more acquisitions occur when stock markets are booming than when markets are depressed. Rhodes-Kropf and Viswanathan (2004) hypothesize that firm-specific and market-wide (mis-)valuations lead to an excess of mergers, and these will be value destroying. This article investigates whether acquisitions occurring during booming markets are fundamentally different from those occurring during depressed markets. We find that acquirers buying during high-valuation markets have significantly higher announcement returns but lower long-run abnormal stock and operating performance than those buying during low-valuation markets. We investigate possible explanations for the long-run underperformance and conclude it is consistent with managerial herding.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhm073